State aid: Commission approves impaired asset relief measure and restructuring plan of Royal Bank of Scotland

The European Commission has approved under EU state aid rules the impaired asset relief measure and the restructuring plan of Royal Bank of Scotland (RBS). The Commission is satisfied that the measures are in line with its guidelines on impaired asset relief and on restructuring aid for banks (see IP/09/322 and IP/09/1180). As such, the state support for RBS is compatible with Article 107(3)(b) of the Treaty on the Functioning of the European Union (TFEU), which allows state aid to remedy a serious disturbance in a Member State's economy. In particular, the measures ensure a sustainable future for RBS without continued state support, foresee an appropriate participation of the bank in the costs of restructuring, and include safeguards to limit distortions of competition, notably by reducing the size of the bank .

Competition Commissioner Neelie Kroes said: "This case has been one of the most complex the Commission has had to deal with during the financial crisis. I am very pleased with the result. The Royal Bank of Scotland will take a number of significant steps to return to long term viability. RBS will itself pay a sufficient share of the restructuring costs and distortions of competition will be limited by substantial divestments. I wish a better and more sustainable future to this bank. But be aware that in case RBS does not deliver on its balance sheet reduction targets by 2013, the Commission will be able to intervene again and more divestments will be required".

Royal Bank of Scotland ("RBS") is one of Europe's largest financial services group. The global crisis in the financial markets and the unprecedented levels of illiquidity experienced in late 2008 brought RBS to the verge of collapse and caused very important impairments and write-offs in its assets. RBS' weakness was the result of a strategy of aggressive expansion, including the acquisition of the wholesale operations of ABN Amro in late 2007, and risky lending financed mainly through wholesale funding.

Under a package of financial support measures approved by the Commission on 13 October 2008 (seeIP/08/1496), RBS received a state recapitalisation of £20 billion (€22 billion), giving the state a 70% stake in RBS. The approval of this recapitalisation was conditional upon the submission of a restructuring plan. This plan was submitted to the Commission on 2 June 2009 and contained additional state measures.

On 26 February 2009, the UK authorities and RBS announced that the bank would take part in the UK's Asset Protection Scheme (APS). The detailed terms of the APS and of the accompanying aid package for RBS were announced in November 2009: thestate would cover 90% of the losses to arise from a £281 billion (€309.1 billion) portfolio of assets. RBS would retain the first £60 billion (€66 billion) of losses and the residual 10% of all further losses. The state would provide a second recapitalisation of £25.5 billion (€28.05 billion) and make a commitment to provide up to £8 billion (€8.8 billion) of additional capital if the bank's core tier one ratio were to fall below 5% in the coming five years.

Long term viability

The Commission considers that the proposed measures will ensure RBS' return to long term viability. The commitment to exit all non-core and riskier business lines will contribute to reinforcing its capital and liquidity position. The bank's participation in the APS will cap the impact of a further impairment of the riskier assets on the bank's capital position and help to restore market confidence in the bank.

Adequate own contribution

The Commission also found that the level of first losses borne by RBS under the APS and the remuneration charged by the state for its different interventions would ensure, together with the restructuring plan, a fair burden-sharing of past losses and an adequate contribution of the bank and its capital providers to the financing of the restructuring costs.

Divestments

The restructuring plan provides for a number of business divestments including RBS' insurance, transaction management and commodity trading operations. These sales are important to generate resources which will limit the need for further aid to finance the return to viability, but also to limit moral hazard (i.e. the danger that a company may take excessive risks if it considers that it will not have to pay for the consequences itself) and distortions of competition brought about by the aid.

In addition, the plan contains a divestment package in the UK SME and mid-corporate banking sector, which is a concentrated market where RBS is the leading bank. The divested entity will have a 5% market share in the SME and mid-corporate banking market gained through more than 300 branches and 40 business and commercial centres. This will facilitate the entry of a new competitor or the reinforcement of a smaller existing competitor on the market and will therefore stimulate competition.

The non-confidential version of the decision will be made available under the case numbers N422/2009 and N621/2009 in theState Aid Registeron theDG Competitionwebsite once any confidentiality issues are resolved. New publications of state aid decisions on the internet and in the Official Journal are listed in theState Aid Weekly e-News.